IDEAS home Printed from https://ideas.repec.org/p/nwu/cmsems/1186.html
   My bibliography  Save this paper

The Optimal Design of a Market

Author

Listed:
  • Matthew O. Jackson
  • Sandro Brusco

Abstract

We study the optimal design of the rules of trade in a two-period market given that agents arrive at different times and may only trade with agents present contemporaneously. First period agents face a fixed cot of trading across periods, and their decisions of whether or not to trade in the second period result in externalities relative to the agents arriving in the second period. Given the non-convexities associated with the fixed cost, competitve trading rules can result in inefficienceis in such a market and, in fact, anonymity must be sacrificed to achieve efficiency. Efficient trading rules have a market maker (i.e., an agent who is given some market power and the right to trade across periods) who faces some competition within period trading, but not across periods. The efficient choice of who should be market maker can be made by auctionaing rights to this position. If there is uncertainty across periods, then efficient mechanisms may involve multiple market makers, and the optimal number of market makers depends on the cost of trading, level of risk aversion, and presence of scymmetric information.

Suggested Citation

  • Matthew O. Jackson & Sandro Brusco, 1997. "The Optimal Design of a Market," Discussion Papers 1186, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  • Handle: RePEc:nwu:cmsems:1186
    as

    Download full text from publisher

    File URL: http://www.kellogg.northwestern.edu/research/math/papers/1186.pdf
    File Function: main text
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. L. Hurwicz, 1979. "Outcome Functions Yielding Walrasian and Lindahl Allocations at Nash Equilibrium Points," Review of Economic Studies, Oxford University Press, vol. 46(2), pages 217-225.
    2. Moore, John & Repullo, Rafael, 1988. "Subgame Perfect Implementation," Econometrica, Econometric Society, vol. 56(5), pages 1191-1220, September.
    3. Bhaskar Dutta & Arunava Sen & Rajiv Vohra, 1994. "Nash implementation through elementary mechanisms in economic environments," Review of Economic Design, Springer;Society for Economic Design, pages 173-203.
    4. Peck, James, 1990. "Liquidity without money: A General equilibrium model of market microstructure," Journal of Financial Intermediation, Elsevier, pages 80-103.
    5. Matthew O. Jackson, 1992. "Implementation in Undominated Strategies: A Look at Bounded Mechanisms," Review of Economic Studies, Oxford University Press, vol. 59(4), pages 757-775.
    6. Lu Hong, 1996. "Bayesian implementation in exchange economies with state dependent feasible sets and private information," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 13(4), pages 433-444.
    7. Gehrig, Thomas, 1993. "Intermediation in Search Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 2(1), pages 97-120, Spring.
    8. Glover Jonathan, 1994. "A Simpler Mechanism That Stops Agents from Cheating," Journal of Economic Theory, Elsevier, vol. 62(1), pages 221-229, February.
    9. Matthew O. Jackson & Thomas R. Palfrey, 1998. "Efficiency and Voluntary Implementation in Markets with Repeated Pairwise Bargaining," Econometrica, Econometric Society, vol. 66(6), pages 1353-1388, November.
    10. Schmeidler, David, 1980. "Walrasian Analysis via Strategic Outcome Functions," Econometrica, Econometric Society, vol. 48(7), pages 1585-1593, November.
    11. Pagano, Marco & Roell, Ailsa, 1996. " Transparency and Liquidity: A Comparison of Auction and Dealer Markets with Informed Trading," Journal of Finance, American Finance Association, vol. 51(2), pages 579-611, June.
    12. Baliga, Sandeep & Corchon, Luis C. & Sjostrom, Tomas, 1997. "The Theory of Implementation When the Planner Is a Player," Journal of Economic Theory, Elsevier, pages 15-33.
    13. Saijo, T. & Tatamitani, Y. & Yamato, T., 1994. "Toward Natural Implementation," ISER Discussion Paper 0340, Institute of Social and Economic Research, Osaka University.
    14. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
    15. Gehrig, Thomas & Jackson, Matthew, 1998. "Bid-ask spreads with indirect competition among specialists," Journal of Financial Markets, Elsevier, pages 89-119.
    16. Roberto Serrano & Rajiv Vohra, 1997. "Non-cooperative implementation of the core," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 14(4), pages 513-525.
    17. Madhavan, Ananth, 1992. " Trading Mechanisms in Securities Markets," Journal of Finance, American Finance Association, vol. 47(2), pages 607-641, June.
    18. Saijo, Tatsuyoshi & Tatamitani, Yoshikatsu & Yamato, Takehiko, 1996. "Toward Natural Implementation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(4), pages 949-980, November.
    19. Albert S. Kyle, 1989. "Informed Speculation with Imperfect Competition," Review of Economic Studies, Oxford University Press, vol. 56(3), pages 317-355.
    20. Bernhardt, Dan & Hughson, Eric, 1996. "Discrete Pricing and the Design of Dealership Markets," Journal of Economic Theory, Elsevier, vol. 71(1), pages 148-182, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yaron Leitner, 2005. "A theory of an intermediary with nonexclusive contracting," Working Papers 05-12, Federal Reserve Bank of Philadelphia.
    2. Matthew O. Jackson, 2001. "A crash course in implementation theory," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, pages 655-708.
    3. Gehrig, Thomas & Jackson, Matthew, 1998. "Bid-ask spreads with indirect competition among specialists," Journal of Financial Markets, Elsevier, pages 89-119.
    4. Comerton-Forde, Carole & Rydge, James, 2006. "The current state of Asia-Pacific stock exchanges: A critical review of market design," Pacific-Basin Finance Journal, Elsevier, pages 1-32.
    5. Yaron Leitner, 2009. "Inducing agents to report hidden trades: a theory of an intermediary," Working Papers 09-10, Federal Reserve Bank of Philadelphia.
    6. Yaron Leitner, 2010. "Inducing agents to report hidden trades: a theory of an intermediary," Working Papers 10-28, Federal Reserve Bank of Philadelphia.
    7. Yaron Leitner, 2003. "Non-exclusive contracts, collateralized trade, and a theory of an exchange," Working Papers 03-3, Federal Reserve Bank of Philadelphia.
    8. Deneckere,R. & Peck,J., 1998. "Demand uncertainty, endogenous timing and costly waiting : jumping the gun in competitive markets," Working papers 22, Wisconsin Madison - Social Systems.
    9. Matthew O. Jackson & Thomas R. Palfrey, 1998. "Efficiency and Voluntary Implementation in Markets with Repeated Pairwise Bargaining," Econometrica, Econometric Society, vol. 66(6), pages 1353-1388, November.
    10. Yaron Leitner, 2004. "Non-Exclusive Contracts, Collateralized Trade, and a Theory of an Exchange," Econometric Society 2004 North American Winter Meetings 397, Econometric Society.
    11. Jan-Peter Siedlarek, 2012. "Intermediation in Networks," Working Papers 2012.42, Fondazione Eni Enrico Mattei.
    12. Huang, Jennifer & Wang, Jiang, 2010. "Market liquidity, asset prices, and welfare," Journal of Financial Economics, Elsevier, vol. 95(1), pages 107-127, January.

    More about this item

    JEL classification:

    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nwu:cmsems:1186. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Fran Walker). General contact details of provider: http://edirc.repec.org/data/cmnwuus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.